Year 2 nominal GDP is A) 200. B) 270. C) 310. D) ...

[mia]

Year 2 nominal GDP is
 
  A) 200.
  B) 270.
  C) 310.
  D) 390.

Question 2

Suppose the government decides to decrease the amount of investment spending that firms are allowed to depreciate for tax purposes from 50 to 25, effective next year.
 
  What effect should this change have on the desired capital stock and the level of investment spending next year? Use a graph to explain your answer.

[Li Jun]

Answer to Question 1

D

Answer to Question 2

If depreciation is decreased, the tax rate on investment projects next year has effectively increased, so the after-tax user cost of capital curve will shift up, from uc1 to uc2. This decreases the desired capital stock from K1 to K2. The decrease in the desired capital stock means the gap between the desired capital stock and yesterday's capital stock has decreased, so firms will decrease investment spending today to try to decrease the capital stock toward the desired level.

[mia]

TYSM

[rachel]

Excellent